The successes and failures of fashion retailers
09 June, 2015
Alright, retail tonight — fashion retail. Tell us about David Jones taking over Kirkcaldies — what do you think?
Indeed! Yeah look, the news came out last week and I was interested because I have always had a soft spot for Kirkcaldies in Wellington. While it hasn't been a very profitable store — in fact it hasn't been profitable the last seven years — it is New Zealand's oldest department store and arguably they've done well to survive, given our changing shopping habits and the growth of online retailing.
For David Jones to come into New Zealand and choose Wellington for their first store I just thought was quite a surprise, rather than choosing Auckland. Secondly, they said that in taking over Kirks they are going to be stocking and positioning the store differently than their Australian stores — so it makes it something of an experiment for them.
In terms of Wellington versus Auckland, you could argue that they chose Wellington because the opportunity arose and Kirks already had a presence there as a major department store, but it is still something of a punt and it's quite contrary to what we've seen elsewhere. In Auckland, we've seen other big retail brands such as Topshop and the likes of Louis Vuitton and Gucci, they've chosen to focus on Auckland first before establishing themselves elsewhere in New Zealand. As the chief of Topshop said when opening their Queen St store earlier this year; "Location is absolutely crucial — having the right space in the right retail area."
I think it's going to be interesting to see whether Lambton Quay proves the right retail area for David Jones. It would be more obvious to position themselves in Queen St, where you've got all the big designer brands — whereas Lambton Quay in Wellington, it's literally on its own. So good luck to them!
With the likes of David Jones and I guess Myers across the Tasman, it's not exactly glory days at the moment is it?
No, not at all! They're having to work really hard just to establish themselves, because it used to be that every major city had a department store and it was a real sort-of destination shop, but people just don't shop that way now.
The other challenge I think for David Jones coming to New Zealand is the variety of merchandise — that's really why you go to a department store, rather than a single store. David Jones stocks 1700 brands and typically have large stores with the biggest being 55,000 sqm, whereas the Kirkcaldies store is only 6000 sqm, so they are going to have to pick and choose which brands they stock.
The David Jones CEO was quoted as saying; "It's not a huge store so if anything we'll err to the premium end". Now I think that is a really interesting position to take, because the premium end of the New Zealand retail scene is pretty skinny and I would argue it's a tough nut to crack. So good luck to them, look I hope it works — but interesting.
Now what about Pumpkin Patch finding no takers — what are your thoughts on that?
I'm really sad about that actually — I've owned Pumpkin Patch shares for a long time and it was sad that after courting a number of interested parties, Pumpkin Patch just couldn't find anyone to buy or recapitalize the business. So instead, they said they're going to focus on "performance improvement initiatives" to try and deliver value to shareholders.
It doesn't surprise me that the share price fell 20% on this news because the price had rallied on the thought that a new owner could come in and reverse the trend of this downward path that Pumpkin Patch has been on for several years, but I think that pursuing performance improvement initiatives in an environment in which the company says it remains challenging, it sounds like hard work and there has been nothing in recent times to give us confidence that the company will be able to get some traction.
I think it's a really disappointing outcome for a company that was once lauded as an international fashion success story. It went from making a full year profit of $30m in 2007 to losing $30m in six months in 2012. I remember when we sold out of our shares in November 2008, seasoned retailers Rod Duke and Jan Cameron (from Kathmandu) could both see the potential of Pumpkin Patch and Rod Duke said at the time that he thought Pumpkin Patch was a "world class company with the smell of success about it. They just do their category very, very well." Well yes they did, which is why I found it particularly disappointing that the company has found itself in the position it is in today.
What about the Zara juggernaut? They have stores everywhere around the globe.
They do indeed — and I thought we've got to finish on a good story about fashion retail! The founder of Zara has just overtaken Warren Buffett to become the world's second-richest person, according to the Bloomberg Billionaires Index. Amancio Ortega is the Spanish magnate who founded Inditex, which is the world's largest clothing retailer, with brands including Zara, operating out of 6,600 stores around the world. His net worth has increased 17% this year to $71 billion, overtaking Warren Buffett whose fortune is just $70 billion.
It's hard to imagine, for me anyway, that a clothing retailer might make such a fortune when we all know how fickle the fashion industry is and we also know that while brands might become established and well-known, they don't always translate into sales, profits and wealth for the owners. In the case of Ortega, he decided to differentiate his Zara business, not by the clothing it produces but in the way the business is run.
He set up what is now known as "fast-fashion retail", with the idea being to deliver what customers want, as quickly as possible. Zara stores receive new stock twice a week and the whole supply chain is many times faster than other fashion competitors. While in most fashion stores, customers look forward to seeing next season's range, Zara customers look forward to seeing next week's range or next month's range.
What do they do with the stuff they can't sell in that time?
That's the wonderful thing, Zara's store managers are empowered to respond to their customer's needs. If they have items that aren't selling, they just get rid of them and replenish them with popular items. So stores are always changing their stock over. As a result, customers visit a Zara store 17 times per year on average (compared to 3 times per year for most fashion retail stores), because you've got to buy today, as the stock won't be there tomorrow. It's an incredible story.
Orders are delivered within 48 hours — this enables Zara as a bricks and mortar company to compete head-on with online fashion websites. Arguably Zara is at the opposite end of the retail spectrum to David Jones and Kirkcaldies, because they sell affordable items quickly and in volume. So far, Zara seems to have found the magic formula to succeed as a mass market fashion retailer. They have no plans to stop, with 8-10% expansion in store numbers planned for the next three to five years.
I enjoyed learning of this success story in what is otherwise an incredibly challenging and competitive industry.